Why Filing Early Makes Sense

Even though many taxpayers file their tax returns on or about April 15 (except during the pandemic in 2020 and 2021), there is no need to put it off until the last minute. Indeed, filing an early tax return can make sense for a variety of reasons.

The federal income tax filing deadline for most Americans has been extended from April 15, 2021, to May 17, 2021. Payment of taxes owed can be delayed to the same date. Your state tax deadline may not be delayed.

The IRS says it issues most refunds within 21 days. However, filers claiming the Earned Income Tax Credit (EITC) or Additional Child Tax Credit may not receive a refund until the first week of March 2021, or even later unless direct deposit is the selected refund delivery method and nothing is flagged as a problem with the return.

Even if you don’t file early, there are reasons to begin your tax preparation as soon as you can. For starters, it gives you the time you need to collect the evidence needed to claim all of your deductions. You will avoid the headache of the middle-of-the-night stress over figures and receipts. If you use a paid preparer, your accountant will have a more flexible schedule and will be able to start working on your accounts sooner.

Also, filing early helps you avoid would-be identity thieves.

Key Takeaways

  • Early filing gets you a faster refund.
  • Lack of rushing gives you time to avoid mistakes that could lead to an audit.
  • Tax planning gives you time to estimate capital gains, harvest tax losses, make last-minute charitable deductions, and shift some deductible items to the most useful tax year.

New Standard Deduction

One of the most important decisions taxpayers have to make is whether to itemize deductions or take the new, larger standard deduction available since 2018.

For 2020, single filers and married taxpayers who file separately can claim a $12,400 standard deduction. (It goes up to $12,550 for 2021). For married couples filing jointly, the standard deduction is $24,800 in 2020 ($25,100 in 2021). Heads of households get a deduction of $18,650 in 2020 ($18,800 in 2021).

The sooner you begin working on your tax return, the sooner you will be able to decide which method is right for you.

SALT Tax Deduction Limit

The tax reforms launched in 2018 also limit your total state and local tax deduction (SALT) to $10,000. This cap may be another incentive to take the standard deduction if your SALT deduction is higher than the new limit and you don’t have a whole lot of other deductions.

Getting a head start on your taxes will help you avoid an unpleasant surprise error when it comes to this important part of your tax return.

A Faster Refund

Avoid procrastination, give yourself peace of mind, and check this important item off your new year’s to-do list. Once the IRS says it will begin processing returns, why not turn yours in and get this unpleasant task over with?

If you live in Texas, your deadline for filing your 2020 taxes and paying any tax due has been moved to June 15, 2021, due to the snowstorm-related federal disaster declaration. If you don't live in Texas but were affected by the storm, you may still be eligible.

For the 2020 filing season, the IRS issued refunds to 123.4 million filers, at an average of $2,476 per refund. If you have money coming to you, there’s no reason to let the government keep it longer than necessary. Filing sooner means a faster refund because the IRS won’t be as busy early in the tax season as it will be in April.

Some people count on their income tax refunds to pay major bills. Filing early puts the money in your hands sooner and may help you avoid taking out an expensive short-term loan to cover those expenses, especially if you’re still paying off your holiday bills.

Prevent Identity Theft

The sooner you file, the less time there is for an identity thief to file in your name and take your refund. This can lead to all sorts of mayhem, especially if the thief claims false deductions, fails to report income, or otherwise taints a tax return in your name. Fixing a mess like this can take months.

Filing early makes you much less vulnerable to identity theft. You'll file before an identity thief can step in and file in your name.

No Crowds and No Penalties

If you mail in your tax return, filing early avoids congestion and a crowded post office. Better to get it done and avoid the hassle.

Filing early gives you time to fully understand any changes to tax law or deal with changes in your life that may alter your filing status. Mistakes from rushing at the last minute can trigger audits that can lead to penalties and interest. Given changes brought on by the TCJA, this point is more important than ever.

Access to Preparer and Information

Your certified public accountant (CPA) or other tax preparer will not be as busy in January or February as in April. Early access means your CPA will have additional time to consider your situation more carefully and help you with your return.

If you are in the process of buying a home or going back to college, it will require information from your recent tax returns. Preparing your taxes early will provide you with the most up-to-date information available.

Avoid Amended Returns

Starting early gives you the time to file an accurate return. An inaccurate return will likely become an amended return. Amended returns invite audits. Here are some things to watch out for as you pursue accuracy.

Mistakes in Official Documents

Check all incoming statements, including W-2s, 1099s, interest statements, and anything used to justify a deduction. Companies, banks, and financial institutions make mistakes. Catch them before you file.

Forms That Arrive Late

Early filing may cause you to miss forms, including a 1099 or K-1 that arrives late. Make sure you have all the documentation you need before you click “send” or drop your return in the mailbox.

Tax-Law Updates Not Reflected in Forms

Legislation passed before April 15 may not be incorporated into paper tax forms or tax software that has not been updated. Watch the news. Be on the lookout for changes that might have been missed. If necessary, you can file an amended return.

For example, for tax year 2017, private mortgage insurance (PMI) was not initially an allowable itemized deduction. On Feb 9, 2018, a tax law reinstated the deductibility of PMI for taxpayers with less than $100,000 in taxable income. By that point, Form 1098, Mortgage Interest Statement, had already been mailed to taxpayers by their lenders. After the tax law change, an amended Form 1098 had to be sent out by lending institutions. Qualifying taxpayers who had already filed taxes needed to file an amended return to include the additional deduction.

Be Honest

If you do have to amend your return, don’t correct only the things that are to your advantage. Correct anything that is wrong.

Recent Changes

As a result of the Tax Cut and Jobs Act (TCJA) of 2017, even the layout of Form 1040 has changed. In fact, if you previously used Forms 1040-EZ or 1040-A, those forms were eliminated. You can use your simplified 2019 return as a template for 2020. And if you're a senior, you can now opt to use the new senior tax form, 1040-SR.

Shifting Tax Burdens

If you take that head start before Dec. 31, you will have time to estimate capital-gains distributions, harvest losses, contribute to a 529 savings plan, or make last-minute charitable contributions. You can also take advantage of the opportunity to shift deductible items—such as property taxes, business expenses, or even mortgage payments—to whichever year makes the most sense tax-wise.

You can still maximize contributions to a company 401(k) and/or any individual retirement account (IRA) plans you have and make deposits to your health savings accounts until April 15 of the year following your tax return date.

Time to Save

If you owe the IRS, filing early gives you time to save up the money. Remember, you don’t have to pay until the filing deadline. Waiting only to find out that you owe more than you expected could put a real crimp in your budget. The IRS suggests reviewing your withholdings and tax payments in the final quarter of the year in order to avoid a surprise tax bill.

It is especially important to review your withholdings in 2020 because you may need to modify them due to a change in circumstances brought on by the coronavirus pandemic.

The IRS has a Tax Withholding Estimator tool, so you can ensure you're withholding accurately.

The Bottom Line

Most experts agree that it’s best to at least start your return as early as possible. The decision to file early may depend on the complexity of your return if you are receiving a refund. Follow the advice of your financial or tax advisor to make sure your return is accurate and complete.